Jerry Citarella: The danger of chasing returns

Something amazing happens on a regular basis. I understand why it happens, but in reality it can be devastating. Most people would say it sounds like a bad idea, but two major factors make this event happen over and over.

The factors are: 1) the fear of missing something, and 2) a lack of true knowledge. Independently, these are a concern, but together they’re very dangerous.

I’m talking about the way people regularly chase investment returns. Let me explain. Statistics show where money is moving in the markets. They show where people are investing and when the money is moving. These statistics also show how each asset-class is performing: what’s doing best, what’s doing worst and everything in between.

When money’s in motion, can you guess where it’s typically going? If you guessed that it was going into what’s been performing best you’re absolutely correct. Consistently, money moves into the top-performing vehicle.

As I said, I understand why this happens. If someone has money to invest, it would seem to make sense to find out what’s doing best and place it there. It’s a simple and obvious recipe for success, right? Unfortunately not.

Studies show that there’s constant motion in the markets. What’s doing best now is typically soon to drop from the top and vice versa. Many times, in fact, the best performing asset-classes move near, or all the way to, the bottom.

The problem with the plan of “chasing returns” is that, typically, top-performing assets aren’t noticed until they’ve been firmly on top for a time. This means the asset-class has worked its way up, generating gains along the way.

An asset might only be at the top for a short period of time, and very often the average investor places his money just before it begins to drop in rankings. This causes disappointment and potential for losses. Often, the investor pulls out and looks for the next opportunity and believe it or not, typically looks again to see what’s doing best and the cycle continues.

All investments go up and down. Things are cyclical. Playing this timing-game can be very dangerous if you truly don’t know what you’re doing. Over the years, I’ve seen many investments have good returns, but investors in them who don’t.

The reason is the investors move money in and out — typically at the wrong time. It’s natural. I get it, but it’s wrong. You cannot have long-term success when you’re always looking to buy something that’s doing well (at the top) only to sell when it starts underperforming. There’s not a book, tape or professional out there who’s preaching “buy high and sell low,” but it happens all the time.

You might say this sounds silly and think I’m exaggerating, or say that you “would never do this,” but I see the statistics and I assure you: this happens all the time. I’ll ask someone why they sold something and their answer is because it “wasn’t doing well.” When I ask them why they didn’t buy more of it, they look at me like I’m crazy.

I’m not saying you should go around buying stuff that’s underperforming, but if you’re looking at basic asset classes and we know that statistically, over many years, they continue to swap spots at the top, wouldn’t it seem to make more sense to buy what’s at the bottom? It’s “cheaper” and if it does rise to the top, you go with it.

I’ll never forget what a mentor of mine once said about investments. He said, “When you have cash in hand, buy what scares you most.” This makes a lot of sense if you truly understand what it means.

Remember, diversification and professional advice is vital, but if you do go it alone, be logical, not emotional. Use what I’ve just told you as a guide and get the knowledge necessary to be successful.

Jerry Citarella is the owner of Infinity Wealth Management www.InfinityGoals.com. 23734 Valencia Blvd., Suite 301, Valencia, 661 255-9555, ext. 11. He is also the author of The Truth Helps Series of financial planning books. Citarella’s column reflects his own views and not necessarily those of The Signal. Submit questions to: jcitarella@nextfinancial.com. Securities and investment advisory services offered through NEXT Financial Group Inc. Member FINRA/SIPC. Infinity Wealth Management is not an affiliate of NEXT Financial Group Inc.